Alternative Investing
Key takeaways:
- Elevated interest rate volatility and stock/bond correlations suggest seeking additional diversification from alternatives.
- Alternatives with low correlations to traditional assets may be able to reduce portfolio risk while also potentially amplifying returns.
- Our Target Allocation with Alternatives models recently increased their allocation to include liquid alternatives, funded mostly from fixed income.
Today’s markets suggest a more creative approach to diversification for risk management
It’s been a volatile three years for everyone’s favorite traditional portfolio diversifier, long-dated treasuries. From the Fed’s rapid rate hikes in 2022, through massive rate swings in 2023 and 2024 based on speculation around future Fed policy (and concern about high levels of U.S. deficits), to today’s outlook of “higher for longer” interest rates, it’s been a rough ride.
Between 2022 and 2024, there were 14 months in which the Bloomberg Aggregate Bond Index and S&P 500 both lost money… and the Aggregate Bond Index participated in nearly half of the downside.
While bonds proved their mettle in February, many multi-asset investors are exploring additional means of portfolio diversification. After all, alternative strategies – strategies that aim to drive idiosyncratic returns by actively trading traditional asset classes (often by using long and short positions) – have been able to provide ballast even during periods of high correlations between stocks and bonds.
Alternative strategies can soften the blow when stocks and bonds both fall
Average monthly returns when stocks are negative, 2022-2025
Source: Morningstar and Bloomberg as of 2/21/25, time frame represented (1/1/2022-1/31/2025). Stocks defined as the S&P 500 TR Index, bonds are represented by the Bloomberg U.S. Agg Bond TR Index, BIMBX refers to the BlackRock Systematic Multi-Strategy Fund, PBAIX refers to the BlackRock Tactical Opportunities Fund, and BDMIX refers to the BlackRock Equity Market Neutral Fund. The performance quoted represents past performance and does not guarantee future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. All returns assume reinvestment of all dividend and capital gain distributions. Please click here for most recent performance of BIMBX, PBAIX, and BDMIX
A few examples of alternative strategies include:
- The BlackRock Global Equity Market Neutral Fund (BDMIX) seeks to capture that stock dispersion across thousands of equity longs and shorts to deliver attractive returns without market beta;
- The BlackRock Tactical Opportunities Fund (PBAIX) seeks to deliver growth that is lowly correlated to traditional stocks and bonds by tactically trading long and short in equities, sovereign bonds and currencies; and
- The BlackRock Systematic Multi-Strategy Fund (BIMBX) seeks to deliver alpha above fixed income returns by combining a fixed income sleeve that can participate in today’s higher yields with a defensive alpha sleeve that provides an alternative source of diversification.
These strategies have been able to deliver higher returns than the Bloomberg US Aggregate Bond Index, with lower risk and lower correlations to stocks.
Alternative strategies have delivered over the past three years
Monthly annualized risk and return correlations to S&P 500 Index, 2022 – 2024
Source: BlackRock, with data from Morningstar from 1/1/2022 to 12/31/2024. “Agg Bond Index” refers to the Bloomberg US Aggregate Bond Index.
When combined in a portfolio, the results can be even more compelling, since these strategies can benefit from having lower correlations to each other as well.
Alternatives strategies, combined in an illustrative portfolio, would have delivered compelling returns
Annualized returns and risk, 2022 - 2024
Source: BlackRock, with data from Morningstar using monthly observations from 1/1/2022 - 12/31/2024. Alternatives allocation is equal weighted across BDMIX, BIMBX, and PBAIX.
Screening alternative strategies
When we look for diversifying alternatives, we look first at correlation vs. traditional assets – and stocks in particular, since stocks generally drive the bulk of a multi-asset portfolio’s volatility.
Next, we look at returns, and more specifically, rolling returns over as long of a time period as possible. We’re looking for strategies that have been able to deliver consistent returns in excess of cash.
Last, we look at the volatility profile of each strategy, and evaluate whether the potential return per unit of risk is worth it. We also use volatility to help drive sizing decisions: the more volatile the strategy, the smaller the allocation necessary to have an impact (good or bad!). This is why we have historically used long duration treasuries as a capital-efficient hedge. Even if we are tactically underweight long duration bonds, they may provide the biggest reaction to a growth shock. And having a little bit can go a long way.
3 steps for screening diversifying alternative strategies
Source: BlackRock, for illustrative purposes only.
The iShares Trusts are not investment companies registered under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940.
Alternative assets: how gold and bitcoin may fit into a portfolio
We’ve also seen alternative assets provide valuable diversification: the iShares Gold Trust (IAU), which aims to track the price of gold, and the iShares Bitcoin Trust ETF (IBIT), which aims to track the price of bitcoin, are both up over 40% over the last year.
Bitcoin and gold have become popular diversifiers for those seeking an alternative source of return from traditional asset classes. Despite their extremely volatile return profiles, both can serve as potential hedges against geopolitical risk. Both assets exhibit low correlations to equities: the 10Y correlation between bitcoin and the S&P 500 has been 0.15, while gold’s 10Y correlation to stocks is -0.01.
Bitcoin and gold performance vs. traditional stocks and bonds (2022-2025 YTD,%)
Source: Bloomberg, BlackRock calculations as of Feb. 21, 2025. Bitcoin returns calculated using Bloomberg Bitcoin Spot Price. SPX is represented by the S&P 500 Index (TR). AGG is represented by Bloomberg U.S. Aggregate Bond Index (TR). Gold returns calculated using the spot exchange rate of gold against the U.S. dollar index. All returns rounded to the nearest percent. Annualized return and risk calculated based on monthly returns from 1/01/22-1/31/25. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.
Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown. For most recent month-end performance and standardized performance, click here.
Adding alternatives to a portfolio: most alternatives funded from fixed income, but bitcoin from equities
Our Target Allocation with Alternatives model portfolio team recently rebalanced, increasing its allocation to liquid alternative strategies and also adding to gold and bitcoin.
They fund most of their alternative allocation from fixed income: strategies with lower risk profiles and/or lower correlations with equities can be funded from fixed income without increasing portfolio risk (and in today’s environment, may even reduce portfolio risk).
The exception to this funding decision was bitcoin: its much higher volatility profile makes equities a more appropriate funding source. Note too that with such a high volatility profile, a little bitcoin can go a long way.
Looking ahead, we could see alternatives continue to play a critical role in portfolio construction: with inflation staying persistent and growth appearing reasonably robust, there may not be impetus for meaningful interest rate cuts from the Fed anytime soon. And while we do see opportunity to clip coupons at today’s higher yield, the pursuit of “cash plus” returns within strategies that have lower correlations to equities could have an even bigger impact on portfolio risk and return.
In fact, when our models team rebalanced on February 27th, they increased their allocation to alternatives across their model suite. The team allocates the largest portion of its fixed income sleeve to alternatives in more equity-heavy models, with the thought being that as the risk of a portfolio goes up, so does the need for assets to diversify that risk.
BlackRock can help you figure out how to build liquid alternatives into your portfolio construction process. You can find more information on the latest Target Allocation model rebalance here, or explore the impact of alternative strategies on your own portfolio using our Advisor Center portfolio tools.
Erin Manifase and Rajan Patel contributed to this article.
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Carolyn Barnette
Head of Market and Portfolio Insights for BlackRock’s U.S. Wealth Advisory business
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